The sub-prime crisis of 2008 and its aftermath brought the reality about the US banking sector and its vulnerability. Consequence to the crisis was several thousand savings and loan associations in the US went bust. The question then asked was how could this happen? Where did the federal reserve and the US govt failed?
We are now ready to ask the same question about India. Let us now look and digest the facts.
- The combined outstanding loan (cumulative debt) of the following companies currently is Rs. 6,31,024,70 crore (a little over a USD 100 Billion)
- ADA group
- Vedanta Resources
- Essar group
- Adani group
- Jaypee group
- JSW group
- GMR group
- Lanco group
- Videocon group
- GVK group
- Debt levels at these groups have risen by 15% year by year, while their profitability is under pressure.
- GVK, Lanco, and ADA gross debt levels are up to 24% year on year, far in excess of their capital expenditure for the year.
- Almost half (23 out of 50) of the top 50 companies by size of their debt couldn’t pay interest on loans in seven or more quarters in the past 2 years.
- 38 out of 50 companies reported losses. For many, their current earnings were not enough to even meet interest payments; leave alone repay the capital.
- Now, turn our attention to the Indian banks. In the past 2 years, Indian banks have restructured over 2 lakh crore of Rupees, which otherwise would have moved in to default category.
- The bank’s lending ability become somewhat compromised because lots of money is locked up in previous bad loans.
- With poor growth in gross domestic capital formation, India Inc’s were allowed to raise money overseas.
- Currently, according to estimates, our foreign currency denominated debt is over 225 billion, Compared to current reserve of 290 billion.
10. To make matters worse, 50% of debt is unhedged. Given the India Rupee vulnerability this is courting disaster.
11. Given the scenario, the lenders whoever they are must be ready to take a deep haircut.
12. This is ominous for India to borrow money overseas. This almost guarantees that our govt bonds sooner or later will be classified as Junk.
13. How do banks survive? The govt will infuse further capital. Between 2010-11 and 2013-14, the govt have infused Rs. 58643 crores capital into the state owned bank. They will continue to do so in the future.
14. According to scenario analysis done by RBI, the failure of a single largest corporate group can end up wiping out half the capital of the entire banking system when 60% of the money is not recoverable.
15. Time has come for Indian govt and the people to come to terms to reality. Denial is only postponing the issue and will eventually drive our economy to bankruptcy.
The amount of money at stake is enormous, the money that could have been put to use in creating infrastructure and productive assets. Instead, it is likely to vanish down the black hole of un-repayable corporate debt.
Now that we have looked at the data and digested the facts, where do we go from here? A few outcomes are likely:
(1) The banks will not have much money left to lend. They will all become collection agency.
(2) Indian economic growth will falter severely
(3) Indian govt bond will hit the junk status sooner than later
(4) The govt may move capital in to banks a fiat currency to save the depositors.
(5) At least if the bankers are smart they could create CDO’s from the repossessed assets.
(6) The real estate bubble is going to burst. To keep up the real estate pricing additional inflow of money is essential but will not be available.
(7) Recklessness, irresponsibility will leave our future generation to pay for our sins.
So much is about the Indian success story. Going forward the RBI and the Indian govt will face the same challenges as the federal reserve of USA and the US govt faced during the sub-prime crisis.